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DaVita HealthCare PartnersJ P Morgan Healthcare

DaVita HealthCare PartnersJ.P. Morgan Healthcare Conference

January 8, 2013

Certain statements in today’s presentation contain forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future. These forward-looking statements include statements regarding our future operations, financial condition and prospects, expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for p p , p g , p , p g , puncollectible accounts receivable, operating income, cash flow, operating cash flow, estimated tax rates, capital expenditures, the development of new centers and center acquisitions, government and commercial payment rates, revenue estimating risk, the impact of our related level of indebtedness on our financial performance, including earnings per share.

These statements involve substantial known and unknown risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including, but not limited to, risks resulting from the concentration of profits generated from commercial payor plans, continued downward pressure on average realized payment rates from commercial payors, which may result infrom commercial payor plans, continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenues or patients, a reduction in the number of patients under higher-paying commercial plans, a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs, the impact of health care reform legislation that was enacted in the United States in March 2010, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, our ability to maintain contracts with physician medical directors, legal compliance risks, including our continued compliance with complex government regulations, current or potential investigations by various government entities and related government or private-party proceedings, continued increased competition from large and medium-sized dialysis providers that compete di tl ith th f d l f i t d d b th t i t t h t bldirectly with us, the emergence of new models of care introduced by the government or private sector, such as accountable care organizations, independent practice association and integrated delivery systems, and changing affiliation models for physicians plans, such as employment by hospitals, that may erode our patient base and reimbursement rates, our ability to complete any acquisitions or mergers, dispositions that we might be considering or announce, or to integrate and successfully operate any business we may acquire, including the HCP business, or to expand our operations and services to markets outside the United States, or to businesses outside of dialysis, variability of DaVita’s cash flows, risks arising from the use of accounting estimates in our financial statements, loss of key HCP employees following the HCP transaction, potential disruption from the HCP transaction making it more difficult to maintain business and operational relationships withHCP transaction, potential disruption from the HCP transaction making it more difficult to maintain business and operational relationships with customers, partners, affiliated physicians and physician groups and others, the risk that the cost of providing services under HCP’s agreements will exceed HCP’s compensation, the risk that laws regulating the corporate practice of medicine could restrict the manner in which HCP conducts its business, the risk that reductions in reimbursement rates and future regulations may negatively impact HCP’s business, revenue and profitability, the risk that HCP may not be able to successfully establish a presence in new geographic regions, the risk that reductions in the quality ratings of health maintenance organization plan customers of HCP could have an adverse effect on HCP’s business, the fact that HCP faces certain competitive threats that could reduce its profitability, or the risk that a disruption in HCP’s healthcare provider networks

ld h d ff t HCP’ ti d fit bilit d th th i k f t t f th i F 10 Qcould have an adverse effect on HCP’s operations and profitability, and the other risk factors set forth in our Form 10-Q.

We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in underlying factors, new information, future events or otherwise. All references to “DaVita” as used throughout this presentation refer to DaVita HealthCare Partners Inc. and/or its subsidiaries. All references to “HealthCare Partners” and “HCP” as used throughout this presentation refer to HealthCare Partners Holdings, LLC and its related entities.

For a reconciliation of non GAAP financial information included in this presentation to the most comparable measure calculated in accordance

©2013 DaVita HealthCare Partners Inc. All rights reserved. 2

For a reconciliation of non-GAAP financial information included in this presentation to the most comparable measure calculated in accordance with GAAP, see the attached reconciliation schedule.

HealthCare Partners

Consolidated Outlook &

Capital StructureKidney Care

At a Glance

Investment Considerations

Building BlocksBuilding Blocks

International


Kidney Care at a GlanceAs of Q3’12

• LTM Revenue $7.6B

• LTM OI $1 3B• LTM OI $1.3B

• U.S. Facilities 1,912

• Patients ~150,000

• LTM Treatments 21.5M

U S P ti t Sh 34%• U.S. Patient Share ~34%


Typical DaVita Center

• $3.9M revenue

• $670K OI

• 78 patients90% Government- 90% Government

- 10% Private

• Number of teammates- 5 nurses- 8 techs

4 th- 4 other

• 16 machines and chairs


Strong Clinical OutcomesAs of Q3’12

• Kt/V > 1.2 98%

l l dA Quality

• % Fistulas Placed 71%

• Ca <= 10.2 98%Leader

• Phos <= 5.5 81%

• CVC use (Day 90) 15%( y )


HealthCare Partners



At a Glance



International


Kidney Care Key Investment HighlightsHighlights

Industry DaVita

• Stable demand growth • Strong clinical outcomesStable demand growth

• Steady cash flows

Significant go e nment acco ntabilit

Strong clinical outcomes

• Scale provider

Strong compliance record• Significant government accountability

• Unusual transparency

• Strong compliance record

• Operating track record

• Reasonable credibility/coherence in DC

• Largely investor owned

• Experienced management team

• Integrated care capability


Stable Demand Growth

• Steady and resilient industry demand

500

US Dialysis Patients(000’s)

- Independent of macroeconomic factors: not cyclical and not seasonal

400

- Limited therapeutic alternatives: transplant 200

300 ’00-’10 CAGR: 3.9%

- Strong center loyalty

• No clinical need controversy 0

100

• No clinical need controversy 0

2000 2002 2004 2006 2008 2010

©2013 DaVita HealthCare Partners Inc. All rights reserved.

Source: USRDS

9

Strong Operating Track Record

In Or Above RangeWe Said(1)

We Did(2) (3) (6)

√

OI

• 2003: $292-312M $355M √

• 2004: $356-380M $402M √

• 2005: $410-435M (4) $462M √$ $

• 2006: $575-645M (5) $701M √

• 2007: $680-750M $800M √

2008 $790 850M $822M √• 2008: $790-850M $822M √

• 2009: $870-930M (6) $940M √

• 2010: $950-1,020M $997M √

• 2011: $1,040-1,100M $1,155M √

• 2012: $1,100-1,200M $1,315-1,330M (7) √

(1) First guidance.(2) Non-GAAP measure; excludes one-time charges and reported prior period recoveries.(3) 2003 and 2004 represent the original amounts as reported and have not been adjusted for the required divestitures that occurred in

connection with the Gambro acquisition. In addition, all amounts presented have not been adjusted for the effects of the required divestitures in connection with the DSI acquisitions.

(4) Gambro acquisition completed October 2005.(5) Includes stock compensation expense; Original guidance excluded stock compensation.


p p ; g g p(6) Effective January 1, 2009, we were required to change the presentation of minority interests (non-controlling interests) in our

consolidated statement of income, which changed the presentation of operating income as well. All prior amounts have not been adjusted to reflect the application of this requirement.

(7) Latest 2012 Operating Income guidance provided October 2012; excludes HCP

Significant Government Accountability

• Transparent Economics

• “Single DRG”• Single DRG

• ~90% government pay

• ~1,000 independent centers

S t l• Some recent closures


Unique Compliance RecordUnique Compliance Record

Initiated Status Result

Lab 1998 Closed 2004 $95M paid to DVA

ED of Pennsylvania 2001 Closed 2007 $0y $

ED of New York 2004 Closed 2009 $0

ND f G i 2008 DOJ d li d 2010 Ci il $0ND of Georgia 2008 DOJ declined 2010; Civil Action Ongoing

$0

ED of Texas 2002 DOJ declined 2010; $55MReached settlement 2012

ED of Missouri 2005 Closed 2012 $0

PRI Dallas 2010 Ongoing TBD

New York -Medicare 2011 Civil only - Pending TBD


HealthCare Partners



At a Glance



International


Building Blocks

# of Treatments X Revenue / Tx Expense / Tx-


Total Tx/Day Growth (YoY)

12.4%

14.2% 14.3%

12.3% 14.0%

Total

7.1%

9.6%

8.0%

10.0%

12.0% TotalTx/Day

4.6% 5.0%4.4%

5.5%4.7% 4.4%

7.1%

4.0%

6.0%

8.0%

0.0%

2.0%

Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12

NAG


Building Blocks



Industry Profit Concentration

80%

100% 10 - 15%Private

30 - 40%Private

60%110 - 115%

Private

40%

85 - 90%Gov’t

60 - 70%Gov’t

0%

20%

(10 15%) Gov’t

-20%

Treatments Revenue Profit

(10 - 15%) Gov’t


Private Revenue Takeaways

Multi-year contracting

Mix?

Dialysis patient equal rights?

Uncertainty of exchanges?


Government Revenue

50% f di l i

Medicare MA, VA, Medicaid

15% f di l i• ~50% of dialysis revenue

- Market basket

• ~15% of dialysis revenue

- Rate pressure

- QIP

- Rebasing in 2014

• MA and VA growth

- Sequestration cut in 2013


Building Blocks



Cost per Treatment

Component HistoricalComponent Historical

• Teammate costs • 1 – 2 %/yr

• Pharma and supplies • Utilization levels dynamic

• Other center-level costs • 1 – 2 %/yr/y

• G&A • In-line with Tx growth (over time)


(over time)

21

HealthCare Partners



At a Glance



International


International

Wh Go Inte national? Challenges

• Large and fragmented markets

Why Go International? Challenges

• Significant upfront investment• Large and fragmented markets

• Growth faster than U.S. market

• Significant upfront investment

• Dilutive for medium-term

• Privatization and government outsourcing gaining momentum

• Greater Risk

• Sustainable margins / ROE

Long-term upside opportunity


HealthCare Partners



Historical Financials

Business Model

Integrated Care ModelIntegrated Care Model



Revenue and Managed Dollars$ in Billions

Total care dollars under management$3.2

Managed dollars

$2.2$2.4

$2.8

$2 4 d$1.6 $1.8 $2.1 $2.4 Reported

2008 2009 2010 2011


Adjusted EBITDA(1)

$ in Millions

$414

$527

$278 $293

$414

$278

2008 2009 2010 2011


(1) EBITDA excluding stock-based compensation expense; see Non-GAAP reconciliation

HealthCare Partners




Business Model




HCP At a Glance

• Operates in 4 states: California, Florida, Nevada, New Mexico

• Senior patients: 190,000

• Commercial patients: 480,000

M di id ti t 70 000• Medicaid patients: 70,000

• Group primary care physicians: 500

• Group specialists: 400

• Affiliated physicians: >8 000• Affiliated physicians: >8,000


Note: Above patient counts are only capitated lives.

Business Model

Commercial Medicare MedicaidCommercial Medicare Medicaid

Multi-year capitated contracts and shared savings pool contracts

Eliminate wasteSuperior quality Downstream rates

Patients: Great access and service yield loyalty and

Physicians: Great working environment yields great


service yield loyalty and attraction

environment yields great recruiting and retention

How HCP Contracts with Health Plans

Marketing &

Illustrative

Medicare Advantage Health Plan

Marketing & Overhead

Profit10,000 lives

$1,000 PMPM

$150 PMPM

10,000 lives$850 PMPM

HealthCare Partners (Globally Managed Risk)

Overhead

(Globally Managed Risk)Profit

All Patient Care N d


Needs

30

Medicare Advantage Market CAGR (’85-’11): 9%2011 In Millions

Total Medicare Spend$550B

Total Medicare Enrollment48M

FFS

Medicare Advantage

Large Growing

Wh S i Ch MA

• Basic Coverage

Why Seniors Choose MA

- One plan covers Part A, B & D components- Reduced cost sharing- Enhanced benefits


• Annual Cost $2,000-$3,000 less out of pocket (LA County)

HealthCare Partners




Business Model




Programs Overlap

Health SupportNo or Low Claims

Care SupportIntense & Frequent ClaimsOutcome

Risk Low High

Lifestyle IssuesHealthy Chronic Catastrophic Terminal

Palliative

i d d i

Disease Management

Complex Care Management

Catastrophic Care

Health Promotion, Wellness, Primary Prevention

Education and Information Sharing

Screening and Secondary Prevention

i iDecision Support


Alignment

• Physician compensation• Physician compensation

- Panel size

- Clinical outcomes

- Patient satisfaction

- Group/regional resource management


Clinical Utilization – CA Example

30-Day All Cause Re-admit RateInpatient Acute Bed Days/1,000 pts

50% Improvementp


HealthCare Partners




Business Model




HCP’s Primary Markets

CALIFORNIA FLORIDA NEVADA

Share of key payors’ MA lives 30-40% 50%+ ~100%

Physicians Leading physician group

Payor relations Strong and long-term relationships


Hospitals Strong and long-term relationships

Fundamental Forces of Change

• Strain of FFS healthcare

• Increased incentives for transparent quality & cost• Increased incentives for transparent quality & cost

• Healthcare becoming more “consumer-like”

• Physician consolidation

• Increased comfort with managed care


MA Headwinds

• Scheduled decreases to MA payments• Scheduled decreases to MA payments

- ACA eliminates MA premium to FFS Medicare by 2016C e ates p e u to S ed ca e by 0 6

- Coding intensity adjustment increases in 2014


Offsetting MA Rate Cuts

• Shared impact partially offset:• Shared impact partially offset:

- Benefit changese e t c a ges

- Pass through to providers

- Star ratings

- Payor


ABQ

• What happened and what is happening?What happened and what is happening?

f• What does this imply for HCP’s long-term growth strategy?


Upside

Future

Emerging

• New geographies

• Exchanges• ACOs

New geographies• DualsCurrent

• Commercial• Medicare

Advantage


Advantage

HealthCare Partners




Guidance

OI ($M) Dialysis HCP Consolidated Company

$25 $30 $1 365 $1 3902012 $1,315 - $1,330 $25 - $30per month

$1,365 - $1,390(implied)

2013 $1 350 - $1 450 $400 - $450 $1 750 - $1 9002013 $1,350 $1,450 $400 $450 $1,750 $1,900

OCF ($M) Dialysis HCP Consolidated Company

2013 $1,350 - $1,500


Historical Uses of Cash Q1’06 – Q3’12$ in Millions

$2,100

$1 200 $1,300 $1,200 $ ,

Acquisitions Development Share RepurchasesAcquisitions Development Share Repurchases


Capital Structure – Pro forma for HCP

Total Debt: $8,547Other - $115

$ in Millions

Other $115

Notes

6⅝ Notes - $775

6⅜ Notes - $775

5¾ Notes - $1,250

Tranche B-2 - $1,650

Term Loans Tranche B - $1,719

Tranche A - $913

Tranche A-3 - $1,350


Tranche A $913

Pro Forma Debt Maturities

Term Loan A $350mm Revolver Term Loan A-3 Term Loan B

$ in Millions

$17

$

Term Loan B-2 6.375% sr. notes 6.625% sr. notes New sr. unsecured notes

$1,883

$1,551

$1,250

$3 0

$135$18

$1,663

$17

$17 $775

$ ,$1,169

$894$792$350

$878

$1,551

$775 $775

$1,250

$775$792

$650

$203

$

$17

$775 $775


2015 2016 2017 2018 2019 2020 2021 2022

47

Summary

• Distinctively strong cash flowDistinctively strong cash flow

• Kidney care34% national share- 34% national share

- Essential service- High quality = savingsHigh quality = savings- Bell curve

• HCP• HCP- Huge market

Fragmented- Fragmented- High value-add- Build growth engine


Build growth engine

48

DaVita HealthCare PartnersJ P Morgan Healthcare

DaVita HealthCare PartnersJ.P. Morgan Healthcare Conference

January 8, 2013

Reconciliations for Non-GAAP Measures

Reconciliation of trailing twelve months operating income excluding a pre-tax legal proceeding contingency accrual and related expenses.

We believe that operating income excluding a pre-tax legal proceeding contingency accrual and related expenses enhances a user’s understanding of our normal operating income for these periods by providing a measure that is meaningful because it excludes an unusual charge for a legal proceeding contingency accrual that resulted from an agreement we reached in principle to settle federal program claims relating to our historical Epogen practices during the second quarter of 2012 and accordingly, is more comparable to prior periods and indicative of consistent operating income. This measure is not a measure of financial performance under GAAP and should not be considered as an alternative to operating income.

LTMQ4 2011 Q1 2012 Q2 2012 Q3 2012 Q3 2012

Operating income 330$ 321$ 248$ 341$ 1,240$ Add: Legal proceeding contingency accrual and related expenses 78 78

330$ 321$ 326$ 341$ 1 318$330$ 321$ 326$ 341$ 1,318$



Reconciliation of operating income

We believe that operating income excluding Medicare lab recoveries related to prior years' services gains from insurance settlements the valuation gain on the Product Supply Agreement and noncontrolling interests enhances aWe believe that operating income excluding Medicare lab recoveries related to prior years services, gains from insurance settlements, the valuation gain on the Product Supply Agreement, and noncontrolling interests enhances a user’s understanding of our operating income for these periods by providing a measure that is more meaningful because it excludes Medicare lab recoveries related to prior years' services, insurance settlement gains related to insuranproceeds from Hurricane Katrina and from a fire that destroyed one of our centers, a non-recurring non-cash item that resulted from the termination of our purchase obligation for dialysis machines from Gambro Renal Products Inc. under the Product Supply Agreement, and noncontrolling interests that were originally deducted from operating income, and accordingly is more comparable to prior periods as orignially reported and indicative of consistent operatinincome. This measure is not a measure of financial performance under United States generally accepted accounting principles and should not be considered as an alternative to operating income.

2003(*) 2004(2)2005 2006 2007 2008 2009 2010 2011

Operating income 386$ 395$ 489$ 778$ 909$ 869$ 940$ 997$ 1,131$ Less: Medicare lab recoveries related to prior years' services (24) (8) (4) - - - - - -

G i i ttl t (7) Gains on insurance settlements - - - - (7) - - - - Goodwill impairment charge - - - - - - - - 24 Valuation gain on the product supply agreement - - - (38) (55) - - - -

362 387 485 740 847 869 940 997 1,155 Noncontrolling interests (7) (14) (23) (39) (47) (47)

355$ 373$ 462$ 701$ 800$ 822$ 940$ 997$ 1 155$355$ 373$ 462$ 701$ 800$ 822$ 940$ 997$ 1,155$

*2003 operating income is as originally reported and has not adjusted for the required divestitures related to the Gambro acquisition. (2) Operating income for 2004 excluding the operating income impact of the required divestitures' related to the Gambro acquisition of $29 million and Medicare lab recoveries related to prior years' services, would have been $402 million.



In California, as a result of its managed care administrative services agreement with hospitals, HCP does not assume the direct financial risk for institutional (hospital) services, but is responsible for managing the care dollars associated with both the professional (physician) and institutional services being provided for the PMPM fee attributable to both professional and institutional services. In those cases, HCP recognizes the surplus of institutional revenue less institutional expense as HCP revenue. In addition to revenues recognized for financial reporting purposes, HCP measures its total care dollars under management, which includes the PMPM fee payable to third parties for institutional (h i l) i h HCP h id d i b b h h i l d h i i i hi h i l d d i GAAP HCP l d ll d l GAAP(hospital) services where HCP manages the care provided to its members by the hospitals and other institutions, which are not included in GAAP revenues. HCP uses total care dollars under management as a supplement to GAAP revenues as it allows HCP to measure profit margins on a comparable basis across both the global capitation model (where HCP assumes the full financial risk for all services, including institutional services) and the risk sharing models (where HCP operates under managed care administrative services agreements where HCP does not assume the full risk). HCP believes that presenting amounts in this manner is useful because it presents its operations on a unified basis without the complication caused by models that HCP has adopted in its California market as a result of various regulations related to the assumption of institutional risk. Total care dollars under management is not a measure of financial performance computed in accordance with GAAP and should not be considered in isolation or as a substitute for revenues calculated in accordance with GAAP. Total care dollars under management includes PMPM payments to third parties that are not recorded in HCP’s accounting records and have not been reviewed and are not otherwise subject to procedures by HCP’s independent auditors. The following table reconciles Total Care Dollars Under Management to medical revenues for the periods indicated. “Total Care Dollars Under Management” is a non-GAAP measure.

2008 2009 2010 2011Year ended December 31,

Medical revenues 1,557$ 1,731$ 2,049$ 2,375$ Less: Risk share revenue, net (36) (30) (87) (127) Add: Institutional capitation amounts 638 687 831 964 Total care dollars under management 2,159$ 2,388$ 2,793$ 3,212$



HCP uses Adjusted EBITDA and similar calculations as measures to assess operating and financial performance, including compliance with the financial covenants contained in its senior secured credit agreement. Adjusted EBITDA is defined as net income attributable to HCP before income taxes, net debt expense, depreciation and amortization, stock-based compensation, and any impairment charges. Adjusted EBITDA is not a measure of financial performance computed in accordance with GAAP and should not be considered in isolation or as a substitute for operating income, net income, cash flows from operations, or other p p p g pstatement of operations or cash flow data prepared in conformity with GAAP, or as measures of profitability or liquidity. In addition, the calculation of Adjusted EBITDA is susceptible to varying interpretations and calculation, and the amounts presented may not be comparable to similarly titled measures of other companies. Adjusted EBITDA may not be indicative of historical operating results, and HCP does not mean for it to be predictive of future results of operations or cash flows. Adjusted EBITDA reconciled to net income to HCP is as follows:

2008 2009 2010 2011

Net income 203$ 220$ 330$ 409$ Income tax expense 30 41 49 71 Debt expense 14 6 5 16

Year ended December 31,

Depreciation and amortization 24 26 29 31 Stock‐based compensation 8 6 7 7 Impairment charge 5 - - -Interest income (6) (6) (6) (7) Adjusted EBITDA 278$ 293$ 414$ 527$


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